Are U.S. Companies Actually Reshoring Their Supply Chains?

Published on30 MAR 2022
Topic:
Markets


 

Supply chains have become a top concern for U.S. executives. The pandemic resulted in shipping gridlock and the worst supply-chain disruptions in decades. The war in Ukraine has caused ruptures in trade relations and losses of foreign assets, reminding corporations of their exposure to geopolitical risks.

Companies are focused on strengthening their supply chains, but some of the efforts to make those links more resilient are more underway than others, according to economists at Goldman Sachs. Reshoring appears to be limited so far, as construction of new manufacturing facilities has mostly gone sideways and imports are still growing faster than domestic manufacturing output. Diversification of supply chains appears to be further along, and inventory overstocking is the strategy that’s most clearly underway, says Goldman Sachs Research. Earnings call transcripts show a jump in the number of companies that plan to permanently increase inventories to protect against production disruptions, particularly for durable goods.

Why hasn’t reshoring taken off in the U.S.? It may be that the things that made offshoring popular—like lower labor costs—are still relevant, according to economists at Goldman Sachs. Despite the risks of foreign shocks, it may not be economical or even feasible to be the first company to take on higher production costs as an insurance policy against future crises. Some investors worry that efforts to make supply chains more resilient could increase inflation pressures.

That said, it could also be that it’s too soon to see the shift. U.S. stocks exposed to reshoring have outperformed those linked to offshoring, a sign the market expects manufacturing to pick up. But in the meantime, the fact that reshoring of production, the most expensive response to supply-chain risks, is the least underway suggests that reshoring is contributing less to inflation than other factors like an overheated job market, according to Goldman Sachs Research: “Indeed, the potentially inflationary impact of strengthening supply chain resilience is the main reason why many companies in competitive markets might find it difficult to take these steps.”

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